748 F.

2d 1483

In re MARITIME COATINGS, INC., Debtor.

The MERCHANTS NATIONAL BANK OF MOBILE,
Plaintiff-Appellant,
v.
Robert H. CHING, Trustee, Defendant-Appellee.
No. 83-7569.

United States Court of Appeals,

Eleventh Circuit.
Dec. 17, 1984.

David P. Broome, I. David Cherniak, Mobile, Ala., for plaintiff-appellant.

Charles S. Street, Mobile, Ala., for defendant-appellee.
Appeal from the United States District Court for the Southern District of
Alabama.
Before HILL and HENDERSON, Circuit Judges, and WISDOM * Senior
Circuit Judge.
JAMES C. HILL, Circuit Judge:

The district court, 24 B.R. 900, held in this case that the Merchants National
Bank of Mobile ("Merchants National") was bound by the terms of a consent
judgment concluding litigation incident to a bankruptcy action in which
Merchants National participated as a creditor. Merchants National has appealed,
arguing that it did not consent to the terms of the Consent Judgment and that it
is not bound by those terms. We agree, and we reverse.

A detailed account of the background of this case is set out in our earlier
opinion, Merchants National Bank of Mobile v. Ching, 681 F.2d 1383, 1384-85
(11th Cir.1982). Briefly summarized, Merchants National was a secured
creditor of Maritime Coatings, Inc. ("Maritime"), an Alabama Corporation
performing under contract to Newport News Drydock and Shipbuilding Co.

("Newport News"). Merchants National claimed a security interest in the

accounts and contract rights accruing to Maritime under the contract with
Newport News. In September, 1979, Merchants National filed suit against
Newport News in the United States District Court for the Eastern District of
Virginia ("the Virginia litigation"), alleging a perfected security interest in all
receivables, choses in action, and causes of action owned by Maritime against
Newport News.
3

In March, 1980, during the pendency of the Virginia litigation, Maritime was
adjudicated bankrupt by the United States Bankruptcy Court for the Southern
District of Alabama. In order to continue the pending litigation against Newport
News, Merchants National filed an adversary complaint in bankruptcy court
seeking relief from the automatic stay imposed by section 362(a) of the
Bankruptcy Code, 11 U.S.C. Sec. 362(a) (1979). In an amended complaint,
Merchants National moved the bankruptcy court to adjudicate lien priority with
respect to the claims against Newport News. In August, 1980, the bankruptcy
court conditionally lifted the statutory automatic stay and directed the trustee to
intervene in the Virginia litigation as a third-party plaintiff. In November, 1980,
the bankruptcy court ruled that Merchants National had no interest in any of the
claims brought against Newport News in the Virginia litigation. Merchants
National appealed this ruling.

During the pendency of Merchants National's appeal from the ruling of the
Alabama bankruptcy court, the trustee/third party plaintiff entered into a
stipulation with Newport News settling the Virginia litigation. That stipulation
provided for settlement of all claims against Newport News in return for
payment of $120,000 by Newport News to the Trustee. The stipulation further
undertook to allocate portions of the total settlement amount to each of the
several claims which had been asserted. The Trustee and Newport News
executed this stipulation; Merchants National did not. The stipulation was
incorporated by the Virginia district court into a consent judgment concluding
the Virginia litigation. No appeal was taken by Merchants National from this
action.

The Virginia litigation concluded, Merchants National posted bond with the
bankruptcy court and requested a stay of the disbursement to the Trustee of the
proceeds from the Virginia litigation settlement. Addressing the bankruptcy
action, the district court affirmed the bankruptcy judge's earlier ruling that
Merchants National had no interest in the Virginia litigation. Merchants
National appealed to this court and we partially reversed, holding that
Merchants National was entitled to a "rework" claim against Newport News.
681 F.2d at 1387. Merchants National therefore owned a claim which had been

settled by other parties for an amount to which Merchants National had not
agreed.
6

On remand to the bankruptcy court, Merchants National moved to amend its

complaint to seek declaratory relief: what portion of the Virginia settlement was
allocable to the rework claim. The bankruptcy court, accepting the allocation of
the Trustee and Newport News incorporated into the Virginia Consent
Judgment, denied Merchants National's motion to amend. The district court
affirmed, and Merchants National now appeals that ruling to this court.

Notably, Merchants National does not contest that part of the Consent Judgment
which purports to end all claims against Newport News, nor does it contest the
total amount of the settlement, $120,000. Merchants National's only argument
here is that the amount of that settlement allocated to the rework claim is
inadequate, and that, because Merchants National did not consent to the
allocation in the Virginia Consent Judgment, it is not bound by that allocation.
The Trustee argues that the Consent Judgment is res judicata, and that
Merchants National's remedy for an inadequate allocation was a direct appeal
from the Consent Judgment, not collateral attack.

It is probably true that Merchants National was not bound by the Consent
Judgment which concluded the Virginia litigation. See Commercial Union
Insurance Co. v. Westrope, 730 F.2d 729, 732-33 (11th Cir.1984); 1B J. Moore,
J. Lucas & T. Currier, Moore's Federal Practice p 0.409 n. 2 at 326; Annot., 2
A.L.R.2d at 535-36 (1948). We need not reach that question, however, because
the Consent Judgment on its face determines the controversy before us.

The Virginia district court's Consent Judgment recited that the Trustee and
Newport News moved the court to grant judgment to the Trustee in the total
amount of $120,000 as allocated by the parties. Judgment was then granted in
that amount with the requested allocation set out. In a separate paragraph the
court then addressed the effect of the settlement vis-a-vis all three parties to the
action, and concluded by stating that the Consent Judgment constituted a
release of claims as between all parties to the action, including Merchants
National. Thus the Consent Judgment here at issue was composed effectively of
two parts. Part one undertook to apportion to each claim the funds paid in
settlement. Part two formed the final judgment of the court, concluding the
cause of action. Only part two purported to bind Merchants National.

10

Our reading of the Consent Judgment leads us to believe that the stipulation
upon which it was based was drafted to accommodate exactly the

circumstances which occurred, a change in ownership of one of the claims

against Newport News. The parties desired to conclude the Virginia litigation
by isolating the ongoing controversy between the Trustee and Merchants
National from the resolved question of Newport News' liability on the claims.
This they did, and Merchants National, by accepting the fact of settlement and
the total amount received therefor, has ratified this action.
11

Merchants National has not, however, ratified the allocation component of the
Consent Judgment. Newport News and the Virginia court were manifestly
unconcerned with the amount of the total settlement allocated to each claim;
that question concerned only the Trustee in his ongoing dispute with Merchants
National. The settlement stipulation did not purport to bind Merchants National
to its allocation. Merchants National should therefore have the opportunity to
challenge the Trustee's allocation, and Newport News and the Virginia court
need not be caught up in the action while it does so. We believe this to be the
proper interpretation of the Virginia Consent Judgment and ensuing events, and
we hold that Merchants National is not bound by the allocation component of
the Virginia Consent Judgment.

12

The judgment of the district court is reversed and the case is remanded for
issuance of an order directing the Bankruptcy Court for the Southern District of
Alabama to grant a hearing on the issue of proper allocation of settlement funds
to the rework claim and to make that allocation.

13

REVERSED and REMANDED.

Honorable John Minor Wisdom, U.S. Circuit Judge for the Fifth Circuit, sitting
by designation